Gibson Guitar Corp.

Gibson Settles with Department of Justice

Government Agrees it Will Not Prosecute Any Criminal Action Against Gibson

After many weeks of negotiation, Gibson has settled all issues with the U.S. Government and the Department of Justice. CEO Henry Juszkiewicz commented, "We felt compelled to settle as the costs of proving our case at trial would have cost millions of dollars and taken a very long time to resolve. This allows us to get back to the business of making guitars. An important part of the settlement is that we are getting back the materials seized in a second armed raid on our factories and we have formal acknowledgement that we can continue to source rosewood and ebony fingerboards from India, as we have done for many decades."

Despite the fact that, "...the government acknowledges that Gibson has cooperated with the Government and the investigation conducted by the Fish and Wildlife Service", Gibson was subject to two hostile raids on its factories by agents carrying weapons and attired in SWAT gear where employees were forced out of the premises, the production was shut down, goods were seized as contraband, and threats were made that would have forced the business to close.

CEO Henry Juszkiewicz commented, "We feel that Gibson was inappropriately targeted, and a matter that could have been addressed with a simple contact by a caring human being representing the Government. Instead, the Government used violent and hostile means with the full force of the U.S. Government and several armed law enforcement agencies costing the taxpayer millions of dollars and putting a job-creating U.S. manufacturer at risk and at a competitive disadvantage. This shows the increasing trend on the part of the Government to criminalize rules and regulations and treat U.S. businesses in the same way drug dealers are treated. This is wrong and it is unfair. I am committed to working hard to correct the inequity that the law allows and ensure there is fairness, due process, and the law is used for its intended purpose of stopping bad guys and stopping the very real deforestation of our planet."

Gibson will publish the agreement and the attached Statement of Facts that both the Government and Gibson agreed to, so anyone can independently draw their own conclusions.

Possible questions and answers Gibson would give:

Q.1.

In light of your previous outspoken condemnation of the Government's conduct in this case, why are you taking such a moderate, mild-mannered approach in your official statement?

A.1.1.

The company is gratified that the Government ultimately saw the wisdom and fairness in declining to bring criminal charges in this case.

A.1.2

The "Criminal Enforcement Agreement" we have entered into straightforwardly recognizes that it was inappropriate to criminalize this matter.

Q.2.

In light of the Government's lenient treatment here, does Gibson still believe that amendments to the Lacey Act are necessary to make the law more fair and reasonable?

A.2.

Yes. The outcome here deals only with the particular controversy about the particular fact pattern. A true legislative reform is necessary to avoid systemic criminalization of capitalism, as I explained in my recent Wall Street Journal article.

Q.3.

Wasn't the Government's conduct here, with its armed raid on your headquarters and manufacturing facilities, so outrageous and overreaching as to deserve further Congressional investigation, just calling a spade a spade?

A.3.

I don't retreat from any of my prior commentary, but I am gratified that this resolution puts the matter behind us. We are a forward-looking company hoping to move our business ahead in an environmentally forward-thinking way.

Q.4.

The statement of facts includes Gibson's official acknowledgement that you could have and should have exercised greater due diligence in regard to the importation of the questionable wood from Madagascar. Doesn't this amount to an admission that the company violated the law, notwithstanding all your previous protests?

A.4.

Gibson is strenuously dedicated to continuous environmental improvement. We want to be leaders in our business, and our business includes protecting the environment. We can always do better.

Q.5.

This is a pretty unusual legal deal being executed here. It's not a plea bargain, and it is not a traditional deferred prosecution agreement because there is no draft indictment or other criminal-charging document. But it's apparently not a complete declination, as Gibson is at least paying a nominal penalty. How did you settle on this unique form of agreement, and doesn't it represent just a fig leaf to cover the Government's naked surrender?

A.5.

The case is behind us. The extensive negotiations to reach this agreement succeeded in finding a balance that Gibson supports.

Enclosed please find the case-closing letter sent today by this office to SAC Nicholas E. Chavez, Southwest Region I U.S. Fish & Wildlife Service, memorializing the conclusion of the Government's investigations into potential Lacey Act criminal charges against Gibson and its current or former officers, directors, employees or agents. Your clients and the affected individuals may consider this to represent a final disposition of any and all potential enforcement actions related to the issues described in the case closing letter.

On the understandings specified below, the United States Attorney's office for the Middle District of Tennessee (hereinafter referred to as "this Office") and the United States Department of Justice, Environmental Crimes Section (hereinafter referred to as "ECS"), (hereinafter collectively referred to as "the Government"), and Gibson Guitar Corp. (hereinafter referred to as "Gibson"), by its undersigned attorneys, pursuant to the authority granted by Gibson's Board of Directors, hereby enter into this Criminal Enforcement Agreement ("the Agreement").

This Agreement is part of a resolution of criminal matters relating to allegations that Gibson ordered, purchased, or imported ebony and/or other wood originating in Madagascar, and ebony and rosewood originating in India, to the United States in violation of the Lacey Act, Title
16, United States Code, Section 3371, et seq. and other applicable civil and criminal laws, including, but not limited to Conspiracy, Title 18, United States Code, Section 371. A related agreement resolves the related civil forfeiture matters as further described below.

By this Agreement the Government agrees that it will not prosecute any criminal action, against Gibson (except for criminal tax violations, as to which the Government cannot and does not make any agreement) related to violations of the Lacey Act or any other law resulting from Gibson's order, purchase, or importation of ebony and/or other wood from Madagascar and ebony and rosewood from India, from the beginning of this matter through the date of execution of this Agreement, including without limitation, from June 2008 through September 2009, as described, in part, in Appendix A (Statement of Facts) hereto, which is incorporated by reference herein. The Government enters into this Agreement based, in part, on the following factors: (a) Gibson's voluntary disclosure of the facts described in Appendix A; (b) Gibson's cooperation
with the Government and the investigation conducted by the Fish and Wildlife Service; (c)
remedial efforts already undertaken, and to be undertaken, by Gibson, as described in Appendix
B (Lacey Act Compliance Plan) hereto, which is incorporated by reference herein; (d) unique
considerations relative to Malagasy/U.S. diplomatic relations; and (e) the evidence discovered during the course of the investigation.

It is understood that Gibson accepts and acknowledges responsibility for the conduct set forth in Appendix A. The parties agree that their public statements regarding this Agreement will not contradict the statement of facts in Appendix A.

No information given by or on behalf of Gibson as of the date of this Agreement or at the request of the Government (or any other information directly or indirectly derived there from) will be used against Gibson in any prosecution by the Government or other action against Gibson related to these matters. In the event of any material breach of this Agreement by Gibson, the preceding sentence shall become ineffective. This Agreement does not provide any protection against prosecution for any crimes except as set forth herein, and applies only to
Gibson, and not to any other entities or individuals except as set forth in this Agreement. Gibson expressly understands that the protections provided to Gibson under this Agreement shall not apply to any acquirer or successor entities unless and until such acquirer or successor formally adopts and executes this Agreement.

This Agreement shall have a term of eighteen months from the date of this Agreement, except as specifically provided herein. It is understood that for the eighteen month term of this Agreement, Gibson shall: (a) commit no criminal violations; (b) truthfully and completely disclose, upon request, non-privileged information with respect to the activities of Gibson, its current and former directors, officers, and employees, and others, concerning the import or purchase of ebony or other woods for use in manufacturing guitars; and (c) bring to the Government's attention all criminal conduct by, or criminal investigations of, Gibson or any of
its senior managerial employees, that comes to the attention of Gibson or its senior management,
as well as any administrative proceeding or civil action brought by any governmental authority that alleges fraud or criminal violations by or against Gibson.

During the term of this Agreement, Gibson shall: (a) cooperate fully with the Government and any law enforcement agency designated by the Government regarding Lacey Act investigations (b) assist the Government in any Lacey Act investigation or prosecution arising out of the conduct described in this Agreement by providing logistical and technical support for any meeting, interview, grand jury proceeding, or any trial or other court proceeding concerning the Lacey Act; (c) use its best efforts promptly to secure the attendance and truthful statements or testimony of any officer, agent, or employee at any meeting or interview or before the grand jury or at any trial or other court proceeding; and (d) respond to requests for all non­ privileged information, documents, records, or tangible evidence or any designated law enforcement agency inquiries concerning a Lacey Act investigation or prosecution.

It is understood that Gibson agrees to pay a monetary penalty of $300,000 to the United States. Gibson must pay this sum within ten days of executing this Agreement. Pursuant to the Lacey Act, 16 U.S.C. § 3375(d), the payment of the penalty imposed shall be directed to the Lacey Act Reward Account. Gibson acknowledges that no tax deduction may be sought in connection with this payment.

It is further understood that Gibson agrees to make a community service payment of
$50,000 to the National Fish and Wildlife Foundation ("NFWF") to be used by NFWF or another organization selected by NFWF for the purpose of funding a project or projects related to
research and/or activities to promote the conservation, identification, and/or propagation of
protected tree species used in the musical instruments industry as well as the forests in which those species occur. Gibson acknowledges that no tax deduction may be sought in connection with this payment and that it shall not advertise this community service payment except as being a condition for resolving this matter.

It is further understood that Gibson will continue to strengthen its compliance, bookkeeping, and internal controls standards and procedures, as set forth in Appendix B. Gibson further agrees to report to the Government regarding its compliance with this Agreement at the mid-point of the term of the Agreement (9 months after its execution) and 60 days prior to the expiration of the 18-month term of the Agreement.

The Government and Gibson acknowledge and agree that certain questions and inconsistencies now exist regarding the tariff classification of ebony and rosewood fingerboard blanks pursuant to the Indian government's Foreign Trade Policy. Accordingly, the Government will not undertake enforcement actions related to Gibson's future orders, purchases, or imports of ebony and rosewood fingerboard blanks from India, unless and until the Government of India provides specific clarification that ebony and rosewood fingerboard blanks are expressly prohibited by laws related to Indian Foreign Trade Policy. The Government agrees to provide Gibson notice of any such clarification from the Government of India in the future and a reasonable period of time (60 days or as otherwise agreed) to address the potential change in the understanding of the law as it relates to shipments received by or en route to Gibson.

This Agreement shall have force and effect only upon the occurrence of both: (a) execution of this Agreement by the Government and Gibson; and (b) execution of a Civil Settlement Agreement in three civil forfeiture actions before the United States District Court for the Middle District of Tennessee: (a) United States v. Ebony Wood in Various Forms, Civ. No.
3:10-cv-00747, (b) United States v. 25 Bundles of lndian Ebony Wood, Civ. No. 3:11-cv-00913,
and (c) United States v. Indian Ebony and Rosewood, Civ. No. 3:12-mc-00014 (in which a complaint has not yet been filed), whereby Gibson will withdraw any and all claims interposed in U.S. v. Ebony Wood in Various Forms, Civ. No. 3:10-cv-00747, pertaining to wood from Madagascar, and will withdraw any and all claims and file corresponding petitions for remission and mitigation, as provided by law, in the remaining two actions referenced in (b) and (c) above, pertaining to wood from India, which the Government does not oppose.

It is also understood that, if the Government determines that Gibson has committed crimes under the Lacey Act subsequent to the date of signing of this Agreement, determines that Gibson has given false, incomplete, or misleading testimony or information at any time, or should Gibson otherwise violate any material provision of this Agreement, Gibson shall thereafter be subject to prosecution for any federal violation of which the Government has knowledge. Any such prosecution that is not time-barred by the applicable statute of limitations on the date of the signing of this Agreement may be commenced against Gibson,
notwithstanding the expiration of the statute of limitations between the signing of this Agreement and expiration of the term of this agreement plus one year. Thus, by signing this Agreement, Gibson agrees that the statute of limitations with respect to any prosecution that is not time­ barred on the date that this Agreement is signed shall be tolled for the term of this Agreement plus one year.

It is further understood that, if the Government determines that Gibson has committed
any crime after signing this Agreement, or that Gibson has given false, incomplete, or misleading testimony or information, or has otherwise violated any provision of this Agreement, the Government may proceed with further investigation and enforcement. In such further enforcement, Gibson shall not seek to suppress: a) any statements made by Gibson (through any of its current or former officers, directors, or employees) to the Government or other designated law enforcement agents in furtherance of the negotiation of the Agreement or between the date of the Agreement and the violation of the Agreement (including Appendix A hereto and any future testimony given by Gibson or its employees, agents, and officers, before any tribunal), under Rule 410 of the Federal Rules of Evidence or any other statutes, rules, or Constitutional provisions specifically pertaining to statements made to the Government during the course of
plea discussions; and b) any information or evidence derived from leads based on any statements made by Gibson (through any of its current or former officers, directors, or employees) to the Government or other designated law enforcement agents in furtherance of the negotiation of the Agreement or between the date of the Agreement and the violation of the Agreement (including Appendix A hereto and any future testimony given by Gibson or its employees, agents, and officers, before any tribunal), under Rule 410 of the Federal Rules of Evidence or any other statutes, rules, or Constitutional provisions specifically pertaining to statements made to the Government during the course of plea discussions.

It is further understood that this Agreement does not bind any federal, state, local, or foreign prosecuting authority other than the Government as defined in this Agreement. The Government will, however, bring the cooperation of Gibson to the attention of other prosecuting and investigative offices, if requested by Gibson.

It is further understood that Gibson and the Government may disclose this Agreement and the attached appendices to the public.

With respect to this matter, from the date of execution of this agreement forward, this Agreement supersedes all prior, if any, understandings, promises, and I or conditions between the Government and Gibson. No additional promises, agreements, or conditions have been entered into than those set forth in this Agreement and none will be entered into unless in writing and signed by all parties.

Sincerely,

JERRY E. MARTIN United States Attorney

APPENDIX A

STATEMENT OF FACTS

The parties agree that the facts to be resolved by this agreement are as follows:

Defendant Gibson Guitar Corp. ("Gibson") is a privately-held corporation incorporated in Delaware and headquartered and doing business in Nashville, Tennessee. It has a number of different divisions and subsidiaries that manufacture a variety of musical instruments, most notably guitars. Gibson's U.S. guitar manufacturing plants are located in Nashville (Gibson Electric/Gibson USA and part of Gibson Custom); Memphis, Tennessee (Gibson Custom); and Bozeman, Montana (Gibson Acoustic). Gibson also owns the guitar brand, Epiphone, which manufactures guitars in factories outside of the United States, including in China.

The majority owners of Gibson are Henry Juszkiewicz and David Berryman.

The manufacture of guitars includes the manufacture and use of parts called "fretboards," also referred to as "fingerboards." The fretboard of a guitar is the piece attached to the neck of the guitar, immediately under the strings. Technically, on a musical instrument that has frets, a fretboard may be distinguished from a fingerboard by the installation of frets that run perpendicular to the length of the fingerboard. Ebony is one type of wood used by Gibson to make fretboards for its guitars. "Fingerboard blanks" are sawn boards of wood manufactured into fretboards, by drying, cutting, and shaping them, among other steps. (See Figures 1 - 4). Gibson and others frequently refer to what this Agreement describes as "fingerboard blanks," simply as fingerboards. Gibson typically purchases wood in the form of fingerboard blanks cut to particular specifications (length, width, and thickness) from a variety of suppliers.

Figure 1 - Fretboard and two fingerboard blanks

Figure 2 - Fretboard and fingerboard blank, edgewise

Figure 3 - Examples of progression of the manufacturing process from fingerboard blank to fretboard.

Figure 4 - Fretboards attached to guitar necks

Madagascar Ebony (Diospryos spp.) is the term used to describe members of the genus Disopryos found naturally on the island of Madagascar. Madagascar Ebony is a slow-growing tree species and supplies are considered threatened in its native environment due to over-exploitation. Both legal and illegal logging of Madagascar Ebony and other tree species have significantly reduced Madagascar's forest cover. Madagascar's forests are home to many rare endemic species of plants and animals.

Gibson ordered ebony fingerboard blanks to use in the manufacture of guitars from T.N. GMBH, a company based in Hamburg, Germany. Based upon documentation now in Gibson's possession, T.N. purchased some of its ebony fingerboard blanks from R.T., a forestry operator in Madagascar. Gibson maintains that specific information concerning that sourcing was not provided to Gibson by T.N. when Gibson placed its orders. Gibson assumed, without asking, that T.N. had undertaken to provide it with lawfully harvested and exported materials and, after the execution of the search warrant in this case, T.N. represented to Gibson that it had supplied legally obtained and exported materials.

Malagasy Law and the Status of Ebony

The parties acknowledge that the following memoranda and orders were part of the applicable body of law in Madagascar relating to the harvest and export of ebony:

Departmental Memorandum 001/06/MINENVEF/Mi, issued on February 15,
2006, by the Ministry of the Environment, Water, and Forests mandated that any stockpiles of ebony not declared to the Madagascar government prior to February 15, 2006, were illegal.

Madagascar Interministerial Order 16.030/2006 was issued in September 2006 by three Malagasy Ministries: the Ministry of the Environment, Water, and Forests; the Ministry of Economy, Finance, and Budget; and the Ministry of Industrialization, Trade and Private Sector Development. Articles 1 and 5 of Interministerial Order 16.030/2006. Order 16.030/2006 banned all harvest of ebony and prohibited the export of ebony except in the form of "finished wood" or "finished products." According to the Department's translation of Interministerial Order 16.030/2006, the order further defined "finished" wood as "any wood that has been shaped and processed to its final use and is no longer capable of being modified." Intenninisterial Order 16.030/2006,
Article 6, musical instrument parts, including "guitar fingerboards," were
listed as one example of "finished products;" however, "fingerboard blanks" are not specifically listed.

In late 2008, the Republic of Madagascar compiled inventory records of existing stocks of previously harvested Madagascar ebony and rosewood. After compiling the inventory and determining whether any wood in the stockpiles was legal, "exceptional authority" was granted to specific forest operators to export specific quantities of ebony logs and rosewood pieces and
logs. Interministerial Order 003/2009. R.T., who supplied Madagascar ebony to T.N., was listed in the order as being granted exceptional authority to
export pieces of rosewood from his stockpiles. R.T. was not listed as having been granted exceptional authority to export ebony logs.

June 2008 Madagascar Trip

At the invitation of Greenpeace and other non-profit environmental groups, on June 9,
2008, a Gibson wood product specialist ("Gibson representative") flew to Madagascar for a "fact finding" trip with a group called the "Music Wood Coalition," spearheaded by Greenpeace. The trip was designed to assess the potential for supporting sustainable forestry in Madagascar. Part of the justification for the Gibson representative's participation in the trip was that the ebony species preferred for some of Gibson's instruments is found in Madagascar.

In connection with the trip, the Gibson representative received a translation of Madagascar Interministerial Order 16.030/2006, banning the harvest of ebony and the export of any ebony products that were not in finished form. The translation of the Order received by the Gibson representative stated that "fingerboards" are considered "finished" under Madagascar Law. Participants in the Music Wood Coalition trip to Madagascar, including the Gibson representative, were informed by trip organizers that, under the organizers' interpretation of the 2006 Interministerial Order, the
harvest of ebony was illegal and that instrument part "blanks" would be considered
"unfinished" and, therefore, considered illegal to export.

Following the trip, one of the trip organizers, produced a trip report that contained the following statements, among others:

"There are many legal issues pending on wood harvesting and export particularly with ebony and rosewood. It is currently illegal to harvest or export ebony."

"Currently, all wood products have to be in a final finished form before they can be exported. This issue would have to be addressed as instrument makers require wood blanks and pieces that can be further processed to desired dimensions. A possible export contract document that specified dimensions was suggested by the chief law enforcement officer that was traveling with us negotiated at the government level."

"It is currently illegal to harvest any species from natural forests until permitting has been resolved."

"Proving legality is a major problem and tracking woods from origin is even harder."

"There are at least two companies that have controlled the wood export for ebonies and rosewoods both of which sell to [T.N.] .... We visited [R.T.]'s ([T.N.] supplier) wood yard and he is obviously a main player in the market....His wood is under temporary seizure and cannot be moved."

The trip report, containing the above statements, was also attached to an email sent to the Gibson representative and Gibson's President. The Gibson representative forwarded an email, with the trip report attached, to a Gibson wood purchaser and others.

Gibson Ebony Purchases After June 2008

Based on documentation received by Gibson, T .N. continued to receive shipments of wood from R.T., including ebony fingerboard blanks, exported from Madagascar in
2007, after Interministerial Order 16.030/2006 became effective.

According to import documentation as described in the table below, Gibson continued to order Madagascar ebony fingerboard blanks after June 20, 2008. According to import documentation, shipments of Madagascar Ebony fingerboard blanks destined for Gibson entered the United States on the following dates, at the following ports, in the following amounts, for the following invoiced amounts:

Arrival Date

10/2/2008

12/22/2008

4/2/2009

9/28/2009

Port of

Entry Charleston, SC

Newark, NJ

Charleston, SC

New York, NY

Quantity
(pes.)

5147

2014

9066

7133

Invoice
Amount

$52,036.17

$32,505.96

$100,985.16

$76,317.59

information that Gibson had purchased Madagascar ebony from T.N. The trip report emailed to Gibson's President and the Gibson representative indicated that R.T. was a supplier for TN.'s Madagascar wood. The Gibson representative reported to his superiors on February 25,2009, that in light of political instability and violence in Madagascar, R.T. would be able to supply T.N. with ebony "for the grey market," referring to wood that was not documented to be the product of sustainable forestry practices.

Gibson placed and confirmed orders for, and accepted delivery of, at least some of the shipments of Madagascar ebony fingerboard blanks listed in paragraph 10 and scheduled delivery of shipments of Madagascar ebony fingerboard blanks listed in paragraph 10 after June 20, 2008. Gibson also made payments to T.N. and its agent,
a Connecticut-based import company, toward the purchase of the Madagascar ebony fingerboard blanks after June 20, 2008.

For the shipment of Madagascar ebony fingerboard blanks that entered the United States on September 28, 2009, the Madagascar customs documents reflect the ebony was described as classified under series 4418.9010 of the Harmonized Tariff Code ("HTC") when it left Madagascar. The 4418 series applies to "Builders' joinery and carpentry of wood, including cellular wood panels and assembled flooring panels; shingles, and shakes." HTC 4418.90 applies to a subcategory of "other" within the larger category of wood used by builders. Subcategories under 4418.90 include "drilled or notched lumber studs," "wood flooring," arches, roof trusses, and "prefabricated partitions and panels for buildings."

For the shipment of Madagascar ebony fingerboard blanks that entered the United States on September 28, 2009, the Madagascar customs documents reflect the ebony was described as classified under series 4418.9010 of the Harmonized Tariff Code ("HTC") when it left Madagascar. The 4418 series applies to "Builders' joinery and carpentry of wood, including cellular wood panels and assembled flooring panels; shingles, and shakes." HTC 4418.90 applies to a subcategory of "other" within the larger category of wood used by builders. Subcategories under 4418.90 include "drilled or notched lumber studs," "wood flooring," arches, roof trusses, and "prefabricated partitions and panels for buildings."

The U.S. Customs documents reflect that when the September 28, 2009, shipment entered the United States, T.N., acting though a U.S.-based agent, declared the ebony for U.S. Customs purposes under a different tariff classification, HTC series 4407 (wood sawn or chipped lengthwise, sliced or peeled, whether or not planed, sanded,
or end-jointed), from that used when then shipment left Madagascar. No evidence exists to demonstrate that Gibson prepared or participated in the preparation of the tariff classifications at issue.

Between June 20, 2008, and November 17,2009, Gibson did not ask for or obtain paperwork or official assurances from officials in Madagascar that the wood it was purchasing from Madagascar through its German supplier was legally harvested and exported from Madagascar, notwithstanding the information received by Gibson during the June 2008 trip to Madagascar. Before November 2009, Gibson further did not ask for additional paperwork or other confirmation from its supplier that the wood it was purchasing from Madagascar was legally harvested and exported, although
the execution of the search warrant. Instead, Gibson relied on the fact that T.N. was an established, FSC chain of custody certified supplier. Before ordering or accepting delivery of the fingerboards, Gibson should have taken a more active role and exercised additional diligence with respect to documentation of legal forestry practices in the areas of Madagascar from which those shipments from its wood supplier may have originated. Information received by the Gibson representative during the June 2008 trip to Madagascar was not further investigated or acted upon, prior to the continuing placement of orders with the supplier, T.N. Information sent to company management by the Gibson representative and others following the June
2008 trip to Madagascar also was not further investigated or acted upon, prior to the continuing placement of orders with the supplier, T.N. Instead, Gibson continued to purchase Madagascar ebony after June 20, 2008.

The investigation into the harvest and export of valuable tone woods served important environmental and law enforcement objectives, and accordingly, Gibson ceased acquisitions from Madagascar following the execution of the search warrants. Gibson now recognizes that its duties under the Lacey Act with respect to the acquisition of musical instrument parts from foreign sources include reasonable corroboration of the circumstances of their harvest and export, so as to guard against the acquisition of wood of illegal origin.